Bermudan Swaption

A Bermudan swaption is a swaption where the owner has the right to enter into the underlying swap either on the swaption’s first expiry date or on a number of other predefined exercise dates following that date. Typically, these dates coincide with the roll dates on the fixed side of the swap, but any dates can be chosen.

Unlike a European swaption or an American swaption (where you can choose the settlement type), a Bermudan swaption is always swap settled.

In addition, if you enter into the swap on an exercise date beyond the swaption’s first expiry date, then the duration of the swap decreases. This is because the underlying swap's expiry date does not change. For example, you enter into a Bermudan swaption with a swaption expiry date of 2 years (25 June 2011) that gives you the right to enter into a swap for 5 years (25 june 2016) with additional exercise dates after 3 years (25 June 2012) and 4 years (25 June 25 2013). If you enter into the swap on the swaption expiry date (25 June 2011), the underlying swap you enter into is for the entire period, i.e., 5 years. However, if you only decide to exercise the swap on 25 June 25 2012, the swap entered into is only for 4 years in duration.

For information on a European swaption (where the owner can only choose to enter the swap on a single day) see Swaption; for information on an American swaption (where the owner can choose to enter the swap on any date that falls within a specified range) see American Swaption.

Pricing a Bermudan Swaption

When pricing a Bermudan Swaption in SDX Interest Rates, in addition to the fields for a regular swaption (see Pricing a Swaption)—with the exception of the settlement type, which for this instrument is always set to swap settle—you must also define the following:

Swap Term

Defines the time duration between the earliest date the swap can be entered into and the end date of the swap.
You can also specify the swap term and the delay between the current date and the start date together in the Swap Term field. For example, if you enter 2Y3Y, you are specifying that:

The earliest date the swap can begin is in two years time.

The swap, whenever entered into, will terminate three years after the earliest date the swap can begin.

First Eff. Expiry, i.e., the first date on which the swap can be entered into. You can edit this date, as well as subsequent dates on which the swap can be entered into, in the Callable Dates and Fees window (accessed by clicking the Exercise Dates button in the pricing page).

Exercise Freq.

In addition, as a Bermudan swaption is always swap settled, SD always uses the standard market approach—in which the discount factors for the annuity are computed based on the discounting curve that is used for the pricing of the swaption (and that is set by the Collateralization dropdown list in the pricer itself).